Reference no: EM132917350

Seek Ltd has recently changed its target capital structure and expects to maintain it for future investments. This target capital structure is reflected in the current market value of the financing recently undertaken: $350,000 in debt, $628,000 in preference shares and $550,000 in ordinary equity. The following information has been collected to calculate the new weighted average cost of capital 200,000 ordinary shares have been issued with the current market price of $6.00. $50,000 in dividends was paid out this year.

• Dividends are expected to grow at the annual rate of 3%. To float this new issue the firm would have to offer a discount of $0.35 per share below market price. The cost of such an issue is expected to be $0.30 per share.

• 200,000 preference shares issued with a current market price of $6.28 each and dividends of $1.50 per share. Issue cost for preference shares is 1.5% of the market price

• The cost of debt (before tax and after issue costs) has been calculated as 15.72% pa. The firm's tax rate is 35%.

Problem 1: Calculate the weighted average cost of capital (WACC).